Audit finds ambiguity in Oregon Lottery’s casino enforcement

Video gambling machines are a major source of income for a number of retailers even though the Oregon Constitution prohibits “casinos.” Trouble is, casinos are not defined in Oregon law, with the result that the prohibition is not currently subject to effective enforcement.

These are among the findings of an audit of the Oregon State Lottery conducted by the Oregon Secretary of State’s Audits Division.

“It’s clear that neither the Constitution nor the Legislature has provided clarification as to what constitutes a casino,” Oregon Secretary of State Jeanne P. Atkins said. “Still, the Lottery must examine its own policies and procedures to make sure that it is not licensing illegal casinos.”

Casinos operated by recognized Indian tribes on reservation lands are exempt from the Oregon prohibition on casinos.

Auditors examining a selection of establishments known as “Limited Menu Retailers” found that some are earning more than 50 percent of their income from gambling machines such as video poker, in violation of the income rule established by the Lottery Commission.

The income rule has been revised by the Commission from time to time, in an effort to follow a 1997 Oregon Supreme Court ruling that businesses should not feature gambling as a “dominant purpose” or “dominant use”. Like the word “casino,” these terms have not been defined by the courts or the Oregon Legislature.

At the same time, the Commission has altered its investigatory standards. Lottery inspectors are currently relying on a visual inspection to decide whether a retail establishment “looks” like a casino rather than comparing their sales income and lottery income.

About 230 of the 2,300 video machine operators fall into the Oregon Lottery’s “Limited Menu Retailers” category, operating 11 percent of the video gambling machines in Oregon. These establishments generated about 21 percent of the Lottery’s total net receipts from all machines. Last year they received about $34 million in commissions and generated about $125 million in state revenues. Nine individuals or business entities own nearly half of these Limited Menu Retailers.

The audit also found that some retailers are giving away food and beverages to customers, but reporting them as sales, which results in a bottom line that looks less dependent on gambling revenues than it actually is.

Auditors looked at this category of small restaurants and how Lottery was enforcing the casino prohibition. Most of the businesses reviewed were earning more than 50% of their income from the machines.

Oregon Lottery rules limit the number of gaming machines a retailer may have. The retailer earns a commission for each machine. The average commission for a single machine was $26,111 last year.

Auditors recommend that the Lottery Commission seek a clear and enforceable definition of “casino” by working with the Lottery Commission, the Governor, and the Legislature. They also recommend that Lottery verify gross sales reports that retailers submit. For retailers earning more than 50 percent of their income from video gambling machines, the Oregon Lottery should evaluate whether removing a machine would enable the retailer to comply with the Oregon Constitution’s restriction against operating as a “casino.”